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30-Year Fixed Could Rise Above 6% Within Three Years


What goes down must go up, right? Well yes, eventually. It’s just a matter of how quickly and by how much.

It’s been some time since anyone has publicly worried about all those trillions of mortgage-backed securities the Fed purchased over the years via its Quantitative Easing (QE) program, but now fears are beginning to simmer anew.

Per a Bloomberg report, “The Mortgage-Bond Whale That Everyone Is Suddenly Worried About,” the Fed may begin offloading the $1.75 trillion or so of MBS as early as the fourth quarter of 2017.

When then Fed Chairman Ben Bernanke hinted that they were going to finally curtail purchases back in 2013, mortgage rates reacted violently, increasing about a percentage point from April 2013 through that December, in what became known as “taper tantrum.”

Things eventually settled down, and the 30-year fixed fell back to levels pre-tantrum, but there’s new fear about how unloading, as opposed to slowing purchases and reinvestment of MBS, will look.

What Happens When the Fed Starts Selling?

It’s one thing to slow down mortgage bond purchases, and quite another to stop buying and turn around and sell. Someone will need to fill the void seeing that the Fed apparently “owns a third of the market” for U.S. government-backed mortgage debt.

One interest-rate strategist at RBC Capital Market cited in the Bloomberg article expects the Fed to curtail mortgage investments in the fourth quarter of 2017 and “ultimately dispose of all its MBS holdings.”

When there are fewer buyers, there is less demand (for MBS), which happen to play a major role in how mortgage rates are ultimately priced.

Less demand means a lower price for those securities, which means lenders will need to charge higher interest rates on the associated mortgages.

How high is the million-dollar question? Per Moody’s, another source in the Bloomberg piece, exiting the bond-buying market could result in a 6%+ 30-year fixed mortgage rate “within three years.”

How High Is High?

As it stands, the 30-year fixed mortgage is averaging around 4.25%, so we’re talking a huge increase if their prediction comes to fruition.

A ~2% rate increase is certainly enough to derail the booming housing market, which has already grown accustomed to 30-year fixed rates in the high 3% to low 4% range.

What will they think of a 6% mortgage rate? Many probably won’t even remember them being that high, despite it being less than a decade since rates were mostly perched in that realm.

The other big question is how long it will take for the Fed to dump its massive mortgage stash, and if it can do so quietly without another “tantrum.”

I doubt they would do anything that could dismantle the seemingly still fragile housing market, so if they saw interest rates spiking as a result of some unloading or tapering, they’d probably pump the brakes.

Still, if their long-term plan isn’t to hold mortgage securities, they’ve got to get out at some point and it could be painful for future home buyers, or future home prices, granted prices increased during the first tantrum…

The good news is these things always tend to overblown, or baked in, by the time the changes actually take place. So the actual impact is usually a lot smaller.

In the meantime, most expect mortgage rates to stay pretty low and steady through 2017, before climbing a bit in 2018. But if word of this spreads, we could see near-term bumps in rates, which could scare some prospective buyers off.

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